A decomposition algorithm for computing income taxes with pass-through entities and its application to the Chilean case

  • Javiera Barrera
  • Eduardo MorenoEmail author
  • Sebastián Varas K.
S.I.: CLAIO 2016


Income tax systems with “pass-through” entities transfer a firm’s income to shareholders, which are taxed individually. In 2014, a Chilean tax reform introduced this type of entity and changed to an accrual basis that distributes incomes (but not losses) to shareholders. A crucial step for the Chilean taxation authority is to compute the final income of each individual given the complex network of corporations and companies, usually including cycles between them. In this paper, we show the mathematical conceptualization and the solution to the problem, proving that there is only one way to distribute income to taxpayers. Using the theory of absorbing Markov chains, we define a mathematical model for computing the taxable income of each taxpayer, and we propose a decomposition algorithm for this problem. This approach allows us to compute the solution accurately and to efficiently use computational resources. Finally, we present some characteristics of Chilean taxpayers’ network and the computational results of the algorithm using this network.


Income taxes Markov processes Networks Algorithms 



The authors gratefully acknowledge the Department of Studies, Servicios Impuestos Internos, particularly Carlos Recabarren, for introducing us to the problem and its relevance and for their valuable collaboration that led us to obtain these results.


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© Springer Science+Business Media, LLC, part of Springer Nature 2017

Authors and Affiliations

  1. 1.Faculty of Engineering and SciencesUniversidad Adolfo IbáñezSantiagoChile
  2. 2.CIRIC - INRIA ChileSantiagoChile

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